Consumer Law: A Brief Primer(From An Economist’s Viewpoint)

Amelia FletcherESRC Centre for Competition Policy, UEA

UCL Conference in Behavioural IOand Consumer Protection, 17-18 Oct 2014

'Last year, as an April Fool's prank, video game retailer Gamestation put up spoof terms and conditions on its website which committed customers to selling their souls. 'Should we wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamestation.co.uk or one of its duly authorised minions.' On that day 7,500 customers made a purchase from the site. Every single one ticked the box claiming they accepted the conditions, but no one noticed a thing.'

Lucy Kellaway, Financial Times, 23 January 2011

'… the UCPD exists to protect from being misled consumers who take reasonable care of themselves, rather than the ignorant, the careless or the over-hasty.'

Mr Justice Briggs in OFT v Purely Creative Ltd and others, 2011

Scope of today’s talk

What is the point of consumer law?

What are the key elements of consumer law?

What is the economics that underlies consumer law on:

• Unfair contract terms?

• Misselling?

Some thoughts/policy questions

What is the point of consumer law?

Consumer law (and consumer policy more generally) has two distinct roles.

1. To protect consumers against ‘unfair treatment’

o And to provide for redress where required

2. To help markets work well by helping the demand-side function better

o Ensuring competition occurs on the right dimensions (eg instead of on which has the most exploitative hidden terms)

o Enhancing competition by facilitating effective search and switching(eg preventing consumers from being effectively tied into contracts)

NB Behavioural IO is arguably more relevant to latter, but consumer law and policy people typically more concerned about former!

Behavioural IO can also tell us about unintended consequences of consumer protection measures.

What are the key elements of consumer law? A lawyer’s answer General consumer law, which applies to all (or most) products, including:

• Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs)

• Consumer Protection from Unfair Trading Regulations 2008 (CPRs)

• Consumer Contracts (Information, Cancellation and Additional Payments) Regulations 2013

• Consumer Rights Bill 2013 – Still a Bill so far, but would replace UTCCRs

Sector-specific regulations:

• Consumer Credit Act 2008

• Enabling legislation for sectoral regulation

• Specific regulatory rules, as set out by regulators.

Market-specific orders resulting from Enterprise Act 2008 Market Investigations

What are the key elements of consumer law? An economist’s answer

Information provision Misselling Unfair contract terms/ follow-on charges

WYSIWYG

Include all costs upfront (New!)

Returns/refunds for faulty/unwanted goods

Other transparency requirements (some sectoral – can include requirement to provide info in easily comparable format)

Out and out fraud/scams

Aggressive/high pressure sales

Misleading sales

Sales of unsuitable products

Inertia selling (Now clearly covering pre-ticked boxes!)

Unfair contract terms

Consumer helpline charges (New!)

Switching interventions

Switching/’test the market’ requirements

Requirements re PCWs

(Midata initiative)

Search/switching interventions

Unfair Contract Terms……come in various forms:

Unexpected and unfair restrictions to contract scope eg as found in insurance contracts

Terms that impose unexpected and unfair added costs, or allow suppliers to raise ongoing prices unfairly without notice

eg letting agency contracts, utility contracts

Terms that impose unexpected and unfair risks on customers

eg sale and rentback arrangements, hire purchase contracts

Terms that unfairly obstruct switchingeg early cancellation charges in gym contracts, rollover contracts, exit charges in financial products

Unfair Contract Terms: Why do we care? A standard economic view Reading contract terms is time-consuming and effortful even for highly

rational consumers.

This is true even for one supplier, let alone across different suppliers

Standard contract terms are usually viewed as non-negotiable, in which case the incremental benefits of reading may be limited

Thus, overall, it is inefficient for all consumers to read all small print, or even less efficient for them to try to compare it across suppliers

Much more efficient if it can just be assumed ‘fair’ and left unread.

Unfair Contract Terms: Why do we care? A more behavioural view Some consumers lack the skills necessary to assess contracts properly at all

There can be social pressure not to read a contract (it creates a queue, can be seen as a sign of distrust)

Even where contract terms are readily available, consumers can find it hard to deal with complexity, and thus focus on comparing suppliers on the basis of a few variables (eg headline price and core attributes), not small print terms

If contract terms are seen late in the process, consumers may suffer from endowment effects and loss aversion, which make them less likely to change their purchase decision when they see an unfair term. Confirmation bias may also mean they can fail to recognise a term as being unfair.

Where contract terms relate to future events or contingencies, consumers may suffer from present bias, myopia, overconfidence, or a tendency to ignore low probability events, in respect of these contingencies, resulting in these terms being given insufficient weight in consumer decision-making.

Unfair Contract Terms: Proposed law, as in Consumer Rights Bill 2013 Rules will now cover all consumer contracts, whether standard or negotiated

Contract terms will only be enforceable if they are :

• either ‘transparent’ and ‘prominent’: a term will be deemed transparent if it is expressed in plain, intelligible language, and prominent if brought to the consumer's attention in such a way that a reasonably well informed, observant and circumspect consumer would be aware of the term.

• or ‘fair’: A term will be deemed unfair if it puts the consumer at a disadvantage by causing a significant imbalance in the parties' rights and obligations to the detriment of the consumer

Unfair Contract Terms: Is the proposed law in line with economics? The addition of ‘prominent’ seems very sensible. Helps with the ‘Gamestation’ issue.

But recall that ‘prominent’ is defined in terms of whether consumers would be expected to be ‘aware’ of the term. Awareness doesn’t imply proper assessment.

• If we want the law to cover terms that exploit behavioural biases, we arguably need either ‘aware’ or ‘plain and intelligible’ to incorporate the notion of ‘effectively understand and assess’. Does it?

‘Prominent’ is also defined in terms of well informed, observant and circumspect consumers

• But is this right? What does it mean? What about the more vulnerable? • Issue goes to heart of getting the balance right between protecting real

consumers while limiting costly over-paternalism

Also, might we care about terms that obstruct search and switching even if consumers are ‘aware’? Or is this not for consumer law? If not, should it be?

Misselling……comes in various forms:

Misleading re product quality/service/ characteristics

eg wine for ‘£4.99 down from £9.99’

Misleading re total price eg ‘drip pricing’ of airline fares

Misleading re product need/suitability eg pre-ticked boxes, dentistry

Scams (which are basically fraud) eg pyramid selling

Misselling: Why do we care? A standard economic view There can be asymmetric information between consumers and suppliers about

product quality and characteristics, and potentially also around the consumer’s real need for the product.

• This gives rise to the potential for adverse selection and moral hazard. Resulting in lower than optimal quality and potentially missing markets

• To the extent that consumers rely on advisors to help, this advice can be distorted depending on how they are paid

Consumers may be prevented from shopping around effectively if told that the current offer is about to expire (eg because the sale is ending or store is closing down)

• This can reduce competition and lead to poor purchasing decisions.

NB Much of this standard rationale effectively involves suppliers telling lies (or alternatively not being able to commit to telling the truth)

But false and misleading are not identical concepts

False Misleading

But false and misleading are not identical concepts

Misleading but true!

This is where behavioural economics can play a hugely important role!

Misselling: Why do we care? A more behavioural view (1) Consumer decision-making can be influenced by subtle factors, without

suppliers actually lying. For example:

• If consumers deal with complexity by looking at a limited number of variables when comparing suppliers, then simply giving less prominence to more negative aspects of a product can be misleading, as can deliberately increasing complexity or otherwise obfuscating prices or product characteristics.

• If the elements of price or product characteristic are seen only late in the purchase process, as with drip pricing, the consumer may suffer from endowment effects and loss aversion, which reduce the sales impact of these additional elements of price, or confirmation bias, which may result in consumers ignoring the new information.

Misselling: Why do we care? A more behavioural view (2)

• If consumers are not clear about quality, they may be misled by framing effects such as ‘this wine is £4.99 down from 9.99’ even if it is strictly true.

• Consumers may suffer from default bias or inertia, which leads them to buy things without explicit consent, for example because a particular box is ticked.

• Where the value of products inherently relate to future contingencies, consumers may suffer from present bias, myopia, overconfidence, or a tendency to ignore low probability events, in respect of these contingencies, resulting in the negative aspects of these products being underplayed.

• Consumers may struggle with self-control in face of enticing sales patter or may feel forced to make purchases through social pressure.

Misselling: Difficult policy questions (1)Where should we draw the line?

How to tell misleading from acceptable marketing? The line can be thin!

The legal test in the CPRs is whether it appreciably impairs the average consumer's ability to make an informed decision, causing him to make a transactional decision he would not otherwise have taken.

But marketing does this! And political push towards caveat emptor is strong!

Possible solution: Use theoretical and empirical BE work to show why particular practices are especially likely to give rise to harm.

• Work by Steffan Huck for OFT on impact of different pricing practices is a nice example.

• Has already proved useful for expanding the set of practices falling foul of the law – compare case of airline credit card surcharges with that of unauthorised overdraft charges!

Misselling: Difficult policy questions (2)Finding effective, proportionate remedies

Even if harm is found, what is the most proportionate policy response? Possible options include (in broadly increasing extent of intervention):

• Ensure info presented in truthful and intelligible way• Prosecute against clear misselling (eg drip pricing cases) • Require good cancellation rights, in case of ‘hot’ purchase (eg doorstep

lending, extended warranties bought instore)• Limit impulse sales (eg pre-ticked boxes, PPI remedy)• Require suppliers to check suitability (eg affordability test in credit)• Sell only if suitably licensed/qualified (eg professions)• Ban commissions/referral fees that distort consumer advice (eg IFAs,

lawyers)• Specify elements of product design/pricing (eg payday lending)• Ban/limit sale to general consumers (eg CoCos, crowd-funding sites)

Misselling: Difficult policy questions (2)Finding effective, proportionate remedies

Ideal remedy is:

• Effective

• Proportionate

• Allows for possibility of consumer earning or firm reputational effects solving problems, or other market-based solutions

• Has no/limited unintended effects

Empirical behavioural economics work can be useful here, and is increasingly being used, eg through lab and field experiments.

But more theoretical behavioural IO can also be useful, especially on the unintended effects

Consumer Law: A Brief Primer(From An Economist’s Viewpoint)

Amelia FletcherESRC Centre for Competition Policy, UEA

UCL Conference in Behavioural IOand Consumer Protection, 17-18 Oct 2014